27 August 2003

EZA 551 - ECB-Monetary

ECB monetary conditions neutral before US Labor Day
Expectations that the European Central Bank will make a further easing in its key minimum bid rate should be carefully reviewed after the summer break. Euro area monetary conditions around US Labor Day are near to completely neutral. There is little or no chance of any change in policy at the first full Council meeting after the vacation period tomorrow. Liquidity is flowing out of components of euro M3 but credit conditions remain very subdued. Inflation is going nowhere; the outlook into 2004 is flat. A recent ECB working paper also concluded that there are, as we have long maintained, a number of intransigent elements to euro area inflation. The Aug03 ECB monthly report remains however very sanguine on prices and maintains a pessimistic tone on activity, showing no sense of a requirement for tightening action anywhere visible on the policy horizon. Meanwhile, the ECB remains in the throes of a comprehensive internal review on staffing and work processes entitled 'ECB in Motion'. Among other things, this has sparked the sudden release of a mission statement, surprising the markets. This state of flux should last through the presidency change.

SummaryAsset Conclusions: ECB firmly in neutral as early summer fears of dollar collapse give way to more sober assessment, signals of improving activity.

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© Graham Bishop